Starbucks Is Hot—But Not Extra-Hot: Stutland
After Thursday's market close, Starbuck's reported fourth quarter earnings that beat expectations and sent that the shares 4.1 percent higher on Friday. The company reported revenue growth of 11 percent and earnings per share (EPS) growth of 14 percent, both of which were records. The growth was driven by their Americans and Asian/Pacific stores, which reported same-store sales growth of 7 percent and 11 percent, respectively.
Starbucks said that this holiday season was its best ever. According to the company, one in ten adults received a Starbucks gift card, and their limited edition $450 steel gift cards sold out in six minutes. After selling out, they were retailing on eBay for over $1,000. The bullish trading in the stock spilled over to the options market, with 1.8 calls trading for every put.
However, one option trader was selling calls into the strength against a long stock position. In a massive transaction, this trader bought 120,000 shares at $56.84, and sold 1,200 February 60-strike calls for $0.20. This is a "buy-write" trade that suggests the trader is bullish on the stock, but is willing to take profit and sell his shares at $60 if Starbucks is trading at that level or higher at February expiration. By selling the 60-strike call, the trader has reduced the trade's downside by $0.20 — thus managing to effectively pay just $56.64 per share of the stock.
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CEO Howard Schultz seems very optimistic about Starbuck's going forward. Starbucks entered the rapidly growth single-serve coffee market in October with its Verismo machine, and Schultz said, "We are deeply, deeply committed to becoming the leader in the (single-serve coffee) space domestically and internationally." Schultz also noted, even more bullishly, "With Verismo, we are in the nascent stage of building a multi-billion dollar platform for Starbucks over the long term."
Starbucks appears to have returned to its pre-recession growth levels, when it regularly posted same-store sales growth of 7 percent, and the company has a strong outlook for growth going forward. The coffee giant has successfully created strong brand loyalty through Starbucks cards, which account for 15 percent of purchases, and Starbucks is well-positioned to become a top player in the single-serve market through VIA, Verismo, and K-Cups.
This trader, though, is keeping expectations reasonable, and is happy to take profits on his stock if shares jump another 5.6 percent to $60 over the next three weeks. Given that the stock is trading at 29.1 times free cash flow, and at a 30.5 price-to-earnings ratio, the stock is not necessarily a value buy here, so the call sale subsidizes the stock purchase a bit while leaving plenty of room for the shares to appreciate on earnings momentum. The buy-write strategy is a great way to play an expensive stock that popped on earnings, but could run higher on momentum and growth expectations.
Disclosures: My days of owning Starbucks are over, but this might be an interesting and safe play for a short-term trade.
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."